Physical distancing means Air NZ turbo props can only be half full. Photo / Warren Buckland
Physical distancing rules on flights mean the shape of financial recovery for Air New Zealand is getting that much scarier.
Chief executive Greg Foran warned the airline wasn't seeing a V-shape recovery or a U.
''It's more like an L. It's just a question of how long that bottom of the L takes to ramp itself back up,'' he said on an analysts' call following the release of the airline's $454 million after tax loss, its first full year loss since 2002.
Like the rest of New Zealand, the airline had experienced a glimmer of what could be in June, July and into August as alert level 1 rules and a strong urge to resume domestic travel had pushed up demand beyond expectations. The network grew to around 70 per cent of pre-Covid levels.
With a meaningful international network off the radar until well into next year, domestic operations had assumed critical importance. In normal years it is about a third of the airline's business.
Air NZ's chief financial officer Jeff McDowall said leisure travel bookings some weeks were ahead of last year.
''It was beyond a recovery really. Which I think is a sign of people choosing to holiday in New Zealand when they can't holiday elsewhere. The corporate market - including government, was a bit slower to recover but got to about two thirds of pre-Covid levels during July.''
The corporate market is especially important as those passengers typically book later and pay more than leisure travellers.
But then came the August 11 announcement of renewed community spread of Covid-19, an alert level rise across the country and level 3 rules for Auckland which meant only essential workers could fly through the city. Physical distancing requirements meant Air NZ - and other airlines - have to operate with restricted passenger loads throughout the country.
This means the airline can operate Airbus A320s at 65 per cent capacity and turbo prop planes at 50 per cent.
McDowall said on the briefing that at that level there's a small cash profit from domestic operations but it is ''not meaningful.''
Margins before the most recent lockdown had been similar to pre-Covid levels.
''It's a fairly significant difference and one that's really not sustainable,'' he said.
The body representing most airlines around the world, the International Air Transport Association, calculated earlier this year that leaving the middle seat empty on an Airbus A320 would increase costs per passenger by 50 per cent.
Of a sample of 122 member airlines, only four would have been able to make money on loads leaving the middle seat empty in the past year.
The association warned in May that to break even while selling fewer seats, airlines would need to increase fares and Air New Zealand warned that low lead-in fares won't be available with planes with much reduced capacity.
Jetstar's suspension of domestic services here because of the distancing requirements takes away some competitive pressure.
The airline is talking to Government agencies, the Ministry of Health and Ministry of Transport about distancing requirements but Health Minister Chris Hipkins this week said changes were not likely in the short-term.
Director general of health Ashley Bloomfield said physical distancing was just as important as using masks on planes - now compulsory from Monday - but the ministry was continuing to work with transport providers, including airlines.
McDowall detailed the scale of job losses among around 12,500 who were working at the company before the pandemic struck.
More than 3500 staff ''have lost their roles,'' a further 600 took voluntary redundancy, and more than 400 others are working reduced hours or taking leave without pay.
Others still have purchased additional leave, have been temporarily redeployed or have elected to go on furlough, with the first right to return when demand picks up.
Labour costs reduced by $154 million, due to the reduced head count, cancellation of incentive payments, as well as the $115m wage subsidy payment ($40m since June 30) received from the Government.
While Foran told the Herald there are no plans to lay off more staff, E tū union said airline workers and their jobs had to be at the centre of the aviation sector's recovery.
An E tū cabin crew member, who prefers not to be named, says although the company had recently thanked staff and was going through cost-saving measures to protect jobs, it now needed to "put its money where its mouth is" with regards to its people.
"There's always a fear of redundancy. I don't think anyone feels comfortable right now or could say with 100 per cent certainty that their job is safe."
They say the way that the wave of redundancies was handled during the first lockdown has left a bitter taste behind.
"It was the speed with which the redundancies happened – the fact that people were isolated and unable to get together and talk about it. There's a sense that there's always the chance that [the company] could have saved more jobs."
E tū's head of aviation, Savage, said the airline was "heavy-handed" in how it went about its cost reductions, including its clumsy handling of fare refunds and had damaged its reputation with the public and with employees.
"They are no longer the respected brand they once were, and the approach to cost reduction via mass redundancies is not a sustainable strategy.''
Air New Zealand says it is within days of tapping into the $900m backup loan from the Government as its cash reserves have plunged by about the same amount since the beginning of the year.
However, it is coy on any future equity raising, noted by analysts at Jarden who said there was no update on its capital structure, other than noting it is engaging constructively with the Crown.
Jarden - which dropped its 12-month share price target to 80c - estimates the airline may need $1 billion of additional equity to recapitalise its balance sheet.
Recapitalisation was a necessary minimum first step in building confidence in the recovery of the airline's investment case.
The big risks ahead of the airline were uncertainty over a transtasman bubble, the scale of competition once markets re-open, rising fuel prices, foreign exchange exposure and the consumer environment.
''We continue to view AIR as having a heavily skewed risk/reward at the current share price with operating losses expected to increase significantly in FY21 and the requirement for additional equity likely to drive material shareholder dilution. As such we retain our Underperform rating.''
Air NZ shares were trading at $1.38 at Friday's close.
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